Asymmetric Effects of Monetary Policy: Japanese Experience in the 1990’s

We consider a competitive bank loan market model where the marginal costs of managing and monitoring loans are assumed to increase as borrowers' net worth decreases. We show that the responsiveness of equilibrium bank loan rates to changes in interbank money market rates become weaker as borrowers' net worth decreases. In other words, monetary policy becomes less e ective as borrowers' net worth decreases. We test and con rm this prediction by estimating bank loan rate equations using Japanese data. We nd that the e ectiveness of expansionary monetary policy in the 1990s has been weakened by the deterioration of borrowers' balance sheets, contributing to the long stagnation of the Japanese economy during the period. Preliminary. Do not quote without permission. We thank Fumio Hayashi, Kazuo Ueda, and Hiroshi Yoshikawa for helpful comments. The views expressed in this paper are those of the authors. They do not necessarily re ect those of the institutions the authors belong to. Research and Statistics Department, Bank of Japan. Institute of Policy and Planning Sciences, University of Tsukuba. Institute of Economic Research, Hitotsubashi University.